Top Indicators of a Growth Stall-Out

Successful companies often lose momentum and can experience a stall-out after an initial phase of steep growth. A stall-out is that moment when a company’s growth rate slips into what proves to be a prolonged decline. But, there are ways to identify and avoid stall-outs in advance – and most are within management’s control if spotted in time.

More than any other metric, revenue growth is the primary driver of long-term company performance. Of course, profitable revenue growth is desirable, but high EBITDA growth through margin enhancement is unsustainable. In addition, it’s hard to manipulate the top line over time, and market value and profit measures are much more variable.

An article in the Harvard Business Review entitled When Growth Stalls gives a great summary of the common root causes of stall points. While the article identifies 16 categories of root causes for revenue stall-outs, these four categories account for 55% of the occurrences.

• Premium Position Captivity (26%): the inability of a firm to respond effectively to new, low-cost competitive challenges or to a significant shift in customer valuation of product features.

• Innovation Management Breakdown (13%): a chronic problem in managing the internal business processes for updating existing products and services and creating new ones.

• Premature Core Abandonment (10%): the failure to fully exploit growth opportunities in the existing core business and adjacent customer segments.

• Talent Bench Shortfall (9%): a lack of leaders and staff with the skills and capabilities required for strategy execution. (What stops growth dead in its tracks is the absence of required capabilities at the executive level.)

If you’re feeling like there may be a looming stall point for your company, there is a diagnostic survey of 50 red flags that can help signal the danger in time. Here are some of the top indicators, grouped by functional category, of an impending stall-out as compiled by authors Matthew S. Olson and Derek van Bever in their book Stall Points: Most Companies Stop Growing - Yours Doesn’t Have To.

Finance and General Management

• Our earnings growth rate has outstripped our revenue growth rate for five or more years.

• Cost-cutting and/or productivity improvements account for more than 50% of our year-on-year earnings growth.

• We rely on acquisitions to meet our current year growth targets.

Strategy and Business Planning

• Time and resources meant to be allocated to long-term strategy and top-line growth drivers are routinely diverted to annual planning and near-term earnings concerns.

• Our core assumptions and beliefs about the marketplace and about the capabilities that are critical to support our strategy are not codified or otherwise written down.

• We are not actively exploring new business models within our existing core businesses.

Marketing and Market Research

• Key customers are increasingly unwilling to pay a premium for brand reputation or superior performance.

• Our executives lack effective mechanisms to directly engage with emerging customer and product trends.

• New entrants with new business models or disruptive technologies are garnering an accelerating share of the total market value of all companies in our sector.

Innovation and R&D

• R&D spending is so decentralized that we struggle to direct sufficient resources to significant opportunities for differentiation and growth.

• We are terminating too many product or service initiatives because their "time to material impact" is too long.

• Too many of our new product or service introductions fail to achieve expected returns, due to volume and/or pricing shortfalls.

Sales and Sales Force Management

• More than 70% of our sales are dependent on a single, dominant distribution channel.

• More than 25% of the sales growth in our industry over the past years is through a product/service category or distribution channel we do not currently utilize.

• Our new product and/or service sales are slowed by housing them within existing business units.

Human Resources and Talent Management

• In identifying our high-potential employees, we overweight current business model competencies and underweight required future competencies.

• Our future success is highly dependent on the continued productivity and contribution of a core group of specialized, hard-to-replace employees.

• We are not effective at recruiting / onboarding / retaining senior hires with new skill sets and profiles.

Board of Directors and Governance

• Our board does not include strategy challenge and assumption-testing in the list of risks it manages.

• Our board considers only financial objectives, and not attainment of strategy goals, in performance management and incentive schemes for senior management.

• Our board lacks sufficient market knowledge and diversity of experience to challenge our strategy.

You can download an internal survey tool containing all fifty Warning Signs of an Impending Stall-Out here. Olson and van Bever’s book contains best practices for how to conduct an internal workshop using the tool.

If you’ve been concerned about an impending stall-out, the good news is that you can take action in time to correct your course. Whether you want to reignite growth, or maximize valuation for a successful exit, the best time to start is today.